Health Care Reform Series: Play or Pay As It Looks Today

Transcription

1 Health Care Reform Series: Play or Pay As It Looks Today Tuesday, November 27, 2012

2 presented by Susan Hoffman Shareholder Littler Mendelson, P.C. Philadelphia Judith Wethall Shareholder Littler Mendelson, P.C. Chicago

3 Agenda Full Speed Ahead What We Know Today Play-or-Pay: What is the optimal strategy for you? The Costs to Pay The Costs to Play

4 Election Impact Full Speed Ahead Romney Administration and rebalanced Congress would have thrown future implementation in doubt Still uncertainty with regard to regulations to be issued GOP ObamaCare is the law of the land - Speaker John Boehner to ABC News on 11/8/12 4

5 What s Uncertain Questions on agency regulations: Nondiscrimination rules Subsidies Automatic enrollment Cadillac tax Essential health benefits Continuing court challenges contraception mandate Federal insurance exchanges premium subsidies available for individuals in states that do not set up exchanges?

6 What s Certain The ACA s Requirements: 2014 Health insurance exchanges go live Virtual marketplaces for eligible individuals and small employers to purchase insurance Individual mandate Tax on most individuals for not obtaining health insurance Individuals with household income up to 400% of federal poverty level may be eligible for federal subsidy Employer Mandate/Play-or-Pay

7 Pay or Play Explained...

8 Play-or-Pay Applicable Large Employers that do not provide affordable and minimum essential coverage to fulltime employees (and dependents) pay a penalty, if Any full-time employee receives federal premium assistance on the Exchange.

9 Applicable Large Employer Employer employed at least 50 FTE employees in the preceding calendar year Controlled group rules apply (Code Section 414) Number of employees working more than 30 hours per week for the month PLUS Number of part-time employees hours divided by 120

10 Affordable & Minimum Value Penalty imposed if the coverage offered is either: i. unaffordable because the employee s required contribution is more than 9.5% of their W-2 wages; or ii. the actuarial value of the employer s plan is less than 60%, meaning that the plan pays for less than 60% of the covered health care expenses

11 Minimum Essential Coverage Means coverage under any of the following: Certain government programs Employer-sponsored plans Individual plans Grandfathered health plans DOES NOT INCLUDE: Excepted benefits Limited scope dental/vision Coverage for a specific disease or illness Hospital indemnity Unknown how HRAs are to be treated?

12 Full-Time Employee ACA Definition of Full-Time Employee 30 or more hours a week/130 or more on a monthly basis common law test Lookback/Stability Period Safe Harbor IRS acknowledges practical difficulties of determining FT status on monthly basis and is considering more flexible approach

13 How to Apply Rules to Employees Not Expected to Work FT IRS released safe harbor for determining full-time status of variable hour and seasonal employees Variable hour means it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week Seasonal is determined (for now) on good faith basis

14 New Employees Initial measurement period of three to twelve months from hire date Stability period of at least six months but not shorter than measurement period Administrative period (between measurement and stability periods) permitted, but overall time from hire to offer of coverage limited to 13 months and fraction

15 Ongoing Employees Standard measurement and stability periods (e.g., measurement period of Oct. 15, 2012 to Oct. 14, 2013 and stability period of calendar year) Ongoing and new employees must have same length stability periods (e.g., one year) Different categories of employees can have different periods (CBA/non-CBA; salaried/hourly; employees of different companies or in different states)

16 Employer Mandate Requirements and Penalties No Health Care Coverage Offered Health Care Coverage Offered That is Not Affordable or Does Not Provide Minimum Value PENALTY = $2,000 x (Total number of full-time employees (FTs) 30 FTs) Note: Use FTEs (full-time equivalents) to determine if the employer is subject to the mandate, but use only FTs to measure the penalties. PENALTY = The lesser of: (a) $3,000 for each FT receiving federal assistance to purchase health insurance through an Exchange or (b) $2,000 x (Total Number of FTs 30 FTs)

17 The ACA s Other Penalties Any other failure to comply can result in excise tax $100/day with respect to each individual to whom such failure relates Maximum for unintentional failure is the lesser of: 10% of the total spend of the group health plan for preceding year; or $500,000

18 Weighing the Options

19 Pay-or-Play: It s Not a Simple Question PLAY Who will be eligible for health benefits? Will you change the composition of your workforce? Will you use more part-time employees? Will you change your benefit plan structure? Will you self-fund? Private Exchange? Will you shift cost to employees? Will your plan be affordable and provide minimum value?

20 Pay-or-Play: It s Not a Simple Question PAY Will you increase wages so employees can purchase health insurance on an Exchange? How much will an Exchange plan cost? Will you provide a Defined Contribution instead? Will you cover executives?

21 Pay-or-Play: Weighing Your Options Play: Maintain current plan if affordable and minimum value and offered to all FTs (and dependents) NO PENALTY Play: Offer to all FTs affordable (9.5%) coverage at maximum allowable cost to employee that provides minimum value plan, but shift cost to employees through higher deductibles/co-pays NO PENALTY May encourage some workers to go to Exchange Will cost sharing limits apply?

22 Costs to Play Rising health care costs Towers Watson survey projects a per employee health care cost of $11,507 in 2013, an increase of 5.3% from 2012 (compared to an expected 5.9% increase this year) 17.6% of the GDP Average of $8,100 per person in the U.S. Increased administrative burdens/audits Increased excise taxes and penalties PCORI ($1 per participant then $2 per participant) Reinsurance fees (estimated at $60-$70/participant)

23 Costs to Play Possible Increased litigation More litigation due to ACA mandates Contraception Grandfathered plan status challenged Coverage challenges (e.g. ABA therapy) General predicted increase in class actions regarding fiduciary claims processing; network benefit issues; subrogation/reimbursement; COBRA compliance; stop loss coverage.

24 Pay-or-Play: Weighing Your Options Pay AND Play: Offer coverage to only some FTs PAY $2,000 x all FTs minus 30 Pay AND Play: Offer coverage to all FTs, but premiums unaffordable to some employees who are eligible for federal subsidy or does not provide minimum value PAY $3,000 x FTs who qualify for federal subsidy (or if less $2000 x all FTs minus 30)

25 Pay: Terminate plan Pay-or-Play: Weighing Your Options PAY $2,000 for all FTs minus 30 FTs Pay: Terminate plan and increase taxable wages PAY $2,000 x all FTs Minus 30 FTs plus increased wages

26 Cost to Pay Offering NO coverage If you offer no coverage to full-time employees (over 30 hours per week on average) and at least one of these employees receives assistance under the Exchange Must pay annual fee of $2,000 for each full-time employee (but the first 30 employees are free) Example: Best Bake has 222 full-time employees and does not offer coverage in One of Best Bake s employees gets coverage through the Exchange. Best Bake must pay $384,000 each year. ( = 192 x $2,000)

27 Cost to Pay No Code Section 125 pre-tax plan Employees and employers will now pay more in FICA taxes Example: $117,900 projected 2014 wage base $7, 500 in annual employee premiums x 7.65% = $ in employer paid FICA $ x 222 employees = $127, in annual savings

28 Cost to Pay Self-funded benefits and premiums are deductible eliminating them may result in higher corporate income taxes (if not replaced by wages) Get finance involved early if considering Pay

29 Cost to Pay To what extent can employers provide incentives to employees to forego employer-provided coverage and get exchange-based coverage? Unclear, but wise to be cautious here. Medicare Secondary Payer Rules apply. To what extent will we see employers moving to more contingent and parttime workforces, leased employees, etc.?

30 Cost to Pay Offering some coverage, but not up to the standards of health care reform* If you do offer minimal essential coverage to full-time employees and their dependents, and even one employee receives assistance under the Exchange, you pay the lesser of (a) $3,000 for each person receiving assistance or (b) $2,000 for each full-time employee minus 30 employees. *Coverage is not affordable cost of self-only coverage is more than 9.5% of employee W2 wages; or Plan does not provide 60% actuarial value of benefits

31 Cost to Pay No penalties for failure to cover part-time employees (less than 30 hours per week on average) Must test annually Must allow those who do meet threshold into the plan Cannot kick out for stability period

32 Cost to Pay - soft costs Employee retention Need to look at industry norm Employee health less preventive care more illness, more sick days Executive backlash C- Suite health and nondiscrimination rules Further legislative action General feeling against national health care system

33 Cost to Pay Fact specific determination based on wage and hour characteristics of employer s workforce and nature of coverage Higher wages = less likely the coverage offered will be unaffordable Conversion of premium payments to wages leads to higher workers compensation premiums and FICA taxes, and overtime premiums An employer with a large part-time workforce could avoid the penalties to a large extent versus employer with FTs If self-insured versus insured coverage, may have more flexibility to make coverage more affordable (possibly through reduced coverage or increased costsharing) Also, will need to wait and see what happens with the Exchanges and whether they have adequate pooling of risk Concern is that state exchanges will become loaded with bad risk through antiselection Therefore, if send employees to exchange, might need to increase wages to make employees whole for increased health costs

34 What s Ahead

35 The ACA s Requirements: For 2014 and 2015, states can decide whether to include businesses with 100 or fewer or 50 or fewer employees in their exchange Individual mandate in full effect with penalty increase 2016 $325 or 2% of household income over filing limit Employers with 100 or fewer employees must be able to participate in the exchanges Individual mandate penalty increase 2017 $695 or 2% of household income over filing threshold Employers with over 100 employees may participate in the exchanges if permitted by the states % excise ( Cadillac ) tax on employer-sponsored health benefits over a certain threshold

36 Cadillac Tax 40% excise tax on coverage above a certain threshold Estimates are that substantial percentage of employers will be over threshold $10,200 for individual $27,500 for other Employer response may change health care framework significantly

37 Annual Plan Review ACA Requires Annual Review of Plans Appropriate revisions must be made to plan document and SPD ACA provisions covering such areas as pre-existing condition exclusions, annual and lifetime limits, coverage of children up to age 26, no-cost preventive care, etc. must be in documents First step of review involves inquiry as to whether appropriate documents are currently in place Often welfare plan documentation is incomplete and noncompliant (we see this pre-and post-aca)

38 Wrap Plan Wrap Plan Can Aid Welfare Plan Compliance and Create Efficiencies Put all necessary language in one omnibus document Eliminates need to amend each and every plan document which is subject to ACA Standardize language relating to plan eligibility, service counting, coverage during leaves, etc. File one Form 5500

39 Employment-Related Documents Health care-related provisions in employmentrelated documents- CBAs If coverage is provided under health plan postemployment, this must be provided for in plan documents/insurance documents Otherwise risk that insurer can disclaim coverage Nondiscrimination requirements under insured and self-insured plans Absence of fail-safe language could create significant employer liabilities

40 Start Planning Now 1. Pull together census hours worked and number of full-time employees 2. Begin analysis of Pay or Play and review alternative options to Play 3. Begin discussions with your internal decision makers

41 Legal Disclaimer The general information in the presentation is not intended to be nor should it be treated as tax or legal advice. Additional issues could exist that would affect tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purpose of avoiding tax penalties.

42 Questions & Answers

43 thank you! Susan Hoffman Shareholder Littler Mendelson, P.C. Philadelphia Judith Wethall Shareholder Littler Mendelson, P.C. Chicago